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Oct. 21 — Digitization of tax administration is accelerating in Central and Eastern Europe as
technology costs decline and the early successes of some countries’
use of digital tools to fight fraud spurs others to follow.

Slovakia is among the success stories--according to Patricia Macikova, spokeswoman
for the Financial Administration of the Slovak Republic, the percentage of value-added
tax (VAT) audits that are “justified” by subsequent findings reached 95 percent after
the 2014 introduction of electronic VAT control statements. These require taxpayers
to provide detailed reporting of invoices in their VAT returns and they are then combed
for missing traders and other red flags.

This approach has since been emulated by the Czech Republic, which introduced VAT
control statements in January and, to a degree, also by Poland and Lithuania, among
others, which have gone a step further by introducing standard audit files for tax
purposes.

Similarly, the fact that sales reported by individual entrepreneurs in Croatia jumped
by 55 percent in the restaurant sector and 28 percent in the retail sector—after introduction
of an online system of electronic records of sale a couple of years ago—was hardly
lost on the Czech Republic, now planning to launch a system modeled after Croatia’s
on Dec. 1.

Czech System

The Czech system will initially apply to restaurants and hotels, and from March 1
also to retailers and wholesalers.

The process of digitization of tax administration “has been intensifying in the last
couple of years” according to Peter Molnar, a senior tax manager at EY in Hungary.

In an Oct. 14 telephone interview he told Bloomberg BNA that while many advances have
been driven by the countries in Central Europe racing to catch up with the rest of
the European Union (EU), they are “also copying each others’ already piloted methods.”

To be sure, there is plenty of catching up to do, Andrzej Palys, manager, tax technology
practice, KPMG in Poland, told Bloomberg BNA in a Oct. 13 telephone interview. He
estimates the region to be between five and 10 years behind the rest of the EU in
most respects.

For example, in 2008, Portugal implemented the international standard audit file (SAF-T)
for electronic exchange of reliable data between organizations and tax authorities.
Poland did so this year, he said.

Costly Compliance

But there are also instances of the region starting to pull ahead, Molnar said, citing
the example of Hungary’s electronic road transportation control system (EKAER), launched
Jan. 1, 2015, to help tax and customs authorities fight VAT fraud by monitoring the
physical transportation of goods in and out of Hungary.

Companies do regard many of these changes with apprehension—they come, after all,
with additional costs to ensure compliance, plus there is uncertainty over whether
tax authorities will use additional disclosures to primarily target serious offenders,
as they have been declaring, or whether they will use them indiscriminately, as some
market players fear.

However, there is also the understanding and expectation of good things to come. These
include tax collection systems becoming more transparent, tax audits more predictable
and the overall leveling of the playing field, local tax practitioners said.

“It’s about transformation, it’s a burden, it’s something new, it’s about some costs”
for building up compliance.

Longer term, however, companies stand to benefit, particularly if they invest in internal
compliance tools that will help them ensure that the data they report meets tax administrations’
criteria, Chrenko added.

“Once it is implemented, it will give me, as a company, the comfort of knowing that
what I hand over is correct and that I don’t run the risk of being audited,” he said.

“And even if there is a tax audit from time to time, I don’t have to fear it because
I know that things are under control.”

Multinationals Benefit

Multinationals stand to benefit in particular, Grzegorz Poniatowski, director of fiscal
policy studies at Warsaw-based CASE-Center for Social and Economic Research, told
Bloomberg BNA in an Oct. 17 e-mail.

“As far as multinational businesses are concerned, my impression is that there are
mostly upsides,”
he wrote. He said unfair competition from fraudsters decreases revenue for global
companies, “thus they are in favor of anti-fraud measures, even if they increase compliance
costs.”

An example of this is the steel industry in Poland, where “large players supported
and advocated for introducing reverse charge mechanism and joint liability for VAT
transactions,” Poniatowski wrote.

Minesweeper Approach

Still, Molnar worries about the data that will be used.

“So far the tax inspector came every second year, they looked at the VAT spreadsheet,
they pinpointed a few invoices, they got the invoices, and they checked them,” he
said.

“We call it the mine-sweeper approach, like in the Minesweeper game. Whether they
find something and it exploding into a problem is random.”

Becoming more transparent means that if companies “make mistakes, which they sometimes
do due to the large number and/or complexity of transactions, this can be quickly
and easily spotted,” he explained. You will be under an x-ray. They will see everything,
every transaction. If you make a mistake, it is very likely that they will see it
and come after you.”

And the attitude of the tax authorities can be far from understanding.

“Sometimes in carousel fraud situations when the fraudsters disappear, the inspectors
try to argue that the involuntarily involved multinational also knew or ought to have
known about the fraud and try to make the assessment there,” he said.

According to Chrenko, advances in digitization of tax administration are largely enabled
by technological advances.

“Technologies today make it possible to work effectively and to mine large amounts
of data,” Chrenko said.

“It’s what’s happening in the corporate sector, and states would be stupid not to
join in,” particularly as technology costs decline and computer processing power grows,
he added.

Country-by-Country Data Issues

At the same time, data sets available to tax authorities are growing in variety and
depth—both in terms of what can be collected locally, particularly when it comes to
transactional data, and what becomes available as part of international exchange of
information, such as country-by-country reporting for multinationals in line with
EU and OECD’s anti-tax avoidance recommendations, according to Chrenko.

These data sets are increasingly mapped and analyzed in ways that are similar to the
way banks and insurance companies use forensic analytics to detect fraud, Chrenko
said.

And the overlap with the commercial sector doesn’t end here.

Tax Kiosk

Chrenko said digitization of tax administration also allows for “improving customer
experience”
by eliminating “the need to write information requests and giving me access to the
tax file, to make sure, for example, that I am not in arrears with payments.”

Alena Schillerova, the Czech Republic’s deputy finance minister for taxation and customs,
told Bloomberg BNA in an Oct. 12 telephone interview that that was very much the intention
of the Czech finance ministry and that the working title of the project was “tax kiosk.”

The kiosk would, among other things, draw on a variety of databases to help taxpayers
pre-fill their tax forms and also provide online payment options. Taxpayers already
have online access to parts of their tax files.

But before the kiosk is introduced, the tax administration has to replace its computer
information system that was introduced in 1992 and is built using Informix 4GL, an
application development language that goes back to the mid-1980s.

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